Canadian Solar Inc.("Canadian Solar" or the "Company") (NASDAQ: CSIQ), one of the world's largest solar power companies, announced its financial results for the fourth quarter and fiscal year ended December 31, 2012.
Fourth Quarter 2012 Highlights
Solar module shipments were 404 MW, compared to 384 MW in the third quarter of 2012.
Net revenue was $294.8 million, compared to $326.0 million in the third quarter of 2012.
Revenue derived from the Company's total solutions business represented 12.8% of total revenue, compared to 21.5% in the third quarter of 2012.
Gross margin was 5.0%, compared to 2.2% in the third quarter of 2012.
Cost of revenue included a $6.8 million depreciation charge for underutilized assets, representing 2.3% of revenue.
Diluted loss per share was $2.43, compared to diluted loss per share of $1.01 in the third quarter of 2012.
Non-GAAP adjusted diluted loss per share was $1.01, compared to non-GAAP adjusted diluted loss per share of $1.00 in the third quarter of 2012. A table that provides a reconciliation of GAAP to non-GAAP measure is available at the end of this press release.
Cash, cash equivalents and restricted cash balances at the end of the quarter were $564.3 million, compared to $690.8 million at the end of the third quarter 2012.
Fiscal Year 2012 Highlights
Solar module shipments were 1,543 MW, up 16.6% from 1,323 MW in fiscal year 2011.
Net revenue was $1.3 billion, compared to $1.9 billion in fiscal year 2011.
Gross margin was of 7.0%, compared to 9.6% in fiscal year 2011.
Diluted loss per share was $4.53, compared to diluted loss per share of $2.11 in fiscal year 2011.
Non-GAAP adjusted diluted loss per share was $3.04, compared to adjusted diluted loss per share of $1.68 in fiscal year 2011.
Fourth Quarter 2012 Results
Net revenue for the fourth quarter of 2012 was $294.8 million, down 9.5% from $326.0 million in the third quarter of 2012 and down 37.8% from $474.1 million in the fourth quarter of 2011. Total solar module shipments in the fourth quarter of 2012 were 404 MW, compared to 384 MW in the third quarter of 2012 and 436 MW in the fourth quarter of 2011. Total solar module shipments in the fourth quarter of 2012 included 15.7 MW in the Company's total solutions business, compared to 21.1 MW in the third quarter of 2012 and 16.3 MW in the fourth quarter of 2011.
By geography, in the fourth quarter of 2012, sales to European markets represented 40.6% of net revenue, sales to North America represented 20.0% of net revenue, and sales to Asia and all other markets represented 39.4% of net revenue, compared to 47.9%, 24.9% and 27.2%, respectively, in the third quarter of 2012 and 46.5%, 26.9% and 26.6%, respectively, in the fourth quarter of 2011.
Gross profit in the fourth quarter of 2012 was $14.9 million, compared to $7.3 million in the third quarter of 2012 and $41.4 million in the fourth quarter of 2011. The sequential quarterly increase in gross profit was primarily due to higher shipment volume and a continued reduction in manufacturing costs. The year-over-year decline in gross profit was primarily due to a lower average selling price partially offset by lower manufacturing costs. Cost of revenue in the fourth quarter of 2012 includes a $6.8 million depreciation charge for underutilized assets, representing 2.3% of revenue. Gross margin in the fourth quarter of 2012 was 5.0%, compared to 2.2% in the third quarter of 2012 and 8.7% in the fourth quarter of 2011.
Total operating expenses were $106.4 million in the fourth quarter of 2012, compared to $41.8 million in the third quarter of 2012 and $62.9 million in the fourth quarter of 2011.
Selling expenses were $25.0 million in the fourth quarter of 2012, up 16.8% from $21.4 million in the third quarter of 2012 and up 18.4% from $21.1 million in the fourth quarter of 2011. The sequential increase in selling expenses was primarily due to higher shipment volume as well as an increase in headcount required to expand the Company's project development team targeting opportunities in Japan, China, the U.S. and Canada. The year-over-year increase in selling expenses was due to increases in transportation unit costs, as well as increases in sales and project development headcount and related salary expenses.
General and administrative expenses were $78.3 million in the fourth quarter of 2012, compared to $17.0 million in the third quarter of 2012 and $36.8 million in the fourth quarter of 2011. During the fourth quarter of 2012, the Company made an allowance for doubtful accounts totaling $31.2 million, including $18.6 million relating to one customer in China with liquidity issues. In addition, the Company also made a non-cash provision totaling $30.0 million for an arbitration decision made against the Company by the China International Economic and Trade Arbitration Commission in favor of LDK Solar Co., Ltd. (NYSE: LDK). The Company disputes the merits of the arbitration award and continues to evaluate its legal options. The sequential and year-over-year increase in general and administrative expenses was primarily due to the provision for the arbitration decision and increase in the bad debt allowance for doubtful accounts. Excluding the impact of the non-cash provision for the arbitration decision and the bad debt allowance for doubtful accounts, non-GAAP adjusted general and administrative expenses would have been $17.0 million in the fourth quarter of 2012.
Research and development expenses were $3.1 million in the fourth quarter of 2012, down 7.5% from $3.4 million in the third quarter of 2012 and down 37.6% from $5.0 million in the fourth quarter of 2011. The year-over-year decline in research and development expenses was due to the successful completion of several key research and development projects at the end of 2011.
Operating margin was negative 31.0% in the fourth quarter of 2012, compared to negative 10.6% in the third quarter of 2012 and negative 4.5% in the fourth quarter of 2011. The sequential and year-over-year decline in operating margin was primarily due to the provision for the arbitration decision and the increase in the bad debt allowance noted above. Excluding the above mentioned non-cash provision for the arbitration decision and the bad debt allowance, non-GAAP operating margin would have been negative 10.2% in the fourth quarter of 2012.
Interest expense in the fourth quarter of 2012 was $9.9 million, compared to $15.2 million in the third quarter of 2012 and $11.7 million in the fourth quarter of 2011. The sequential and year-over-year decline in interest expense was primarily due to a shift in the type of borrowings, with a higher portion relating to the construction of projects, as well as slightly lower bank borrowings in the fourth quarter of 2012. As the Company accelerates the build out of its solar power project pipeline in Ontario, Canada, a greater proportion of its short-term borrowings are being used to finance the construction effort and the resulting interest expense is capitalized under project assets and then expensed through cost of revenues when their sale is recognized. Interest income in the fourth quarter of 2012 was $3.7 million, compared to $3.6 million in the third quarter of 2012 and $1.8 million in the fourth quarter of 2011.
The Company recorded a gain on change in fair value of derivatives of $2.3 million in the fourth quarter of 2012, compared to a loss of $5.3 million in the third quarter of 2012 and a gain of $2.4 million in the fourth quarter of 2011. Net foreign exchange loss in the fourth quarter of 2012 was $10.8 million compared to a net foreign exchange gain of $7.0 million in the third quarter of 2012 and a net foreign exchange loss of $14.1 million in the fourth quarter of 2011.
Income tax benefit in the fourth quarter of 2012 was $3.3 million, compared to income tax benefit of $1.8 million in the third quarter of 2012 and income tax expense of $16.3 million in the fourth quarter of 2011.
Net loss attributable to Canadian Solar in the fourth quarter of 2012 was $105.0 million, or $2.43 per share, compared to net loss of $43.7 million, or $1.01 per share, in the third quarter 2012,and net loss of $59.9 million, or $1.39 per share, in the fourth quarter of 2011. Excluding the impact of the non-cash provision for the arbitration decision and the bad debt allowance, on an adjusted non-GAAP basis, net loss attributable to Canadian Solar in the fourth quarter of 2012 would have been $43.7 million, or $1.01 per share.
Financial Condition
As of December 31, 2012, the Company had a cash, cash equivalents and restricted cash balance of $564.3 million, compared to $690.8 million as of September 30, 2012. Operating cash flow was approximately negative $36.3 million in the fourth quarter of 2012, compared to negative $57.6 million in the third quarter of 2012. Excluding the impact of the cash outflows for the Company's previously disclosed acquisition of solar power projects in Ontario, Canada, adjusted operating cash flow, a non-GAAP measure, was negative $13.0 million in the fourth quarter of 2012 compared to positive $11.0 million in the third quarter of 2012.
Accounts receivable balance, net of allowance for doubtful accounts, at the end of the fourth quarter of 2012 was $254.9 million compared to $257.8 million at the end of the third quarter of 2012. Accounts receivable turnover was 92 days in the fourth quarter of 2012 compared to 79 days in the third quarter of 2012.
Inventories at the end of the fourth quarter of 2012 were $274.5 million, compared to $317.8 million at the end of the third quarter of 2012. Inventory turnover was 106 days in the fourth quarter of 2012 compared to 102 days in the third quarter of 2012.
Accounts and notes payable at the end of the fourth quarter of 2012 were $461.6 million, compared to $462.8 million at the end of the third quarter of 2012. Accounts payable turnover in the fourth quarter of 2012 was 150 days compared to 128 days in the third quarter of 2012.
Short-term borrowings at the end of the fourth quarter of 2012 totaled $858.9 million, compared to $890.6 million at the end of the third quarter of 2012. Long-term debt at the end of the fourth quarter 2012 was $214.6 million, compared to $224.2 million at the end of the third quarter of 2012.
As of December 31, 2012, the Company had $301.6 million in total stockholders' equity, compared to $402.6 million as of September 30, 2012.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "2012 was a difficult year for the entire solar industry. Despite the headwinds, we maintained our practice of balancing the desire to expand with the need for prudent business management and cost control. As a result, Canadian Solar has fared better than most of our competitors. We have further increased our market share, and rapidly established our total solutions business with investments in the mid- and downstream segments. We have, at the same time, achieved one of the lowest production costs among our peers, and we also achieved a more evenly balanced geographic distribution. We are especially proud of our success in the Japanese market where our shipments tripled during the year. Moving forward, we are uniquely positioned as we do not have to carry the baggage of underperforming polysilicon manufacturing assets and the liability of large long-term supply contracts that some of our competitors have. Our light manufacturing strategy combined with targeted investments in our downstream total solution business puts us in a good competitive position to emerge from the current industry cycle as a stronger leader."
Michael G. Potter, Senior Vice President and Chief Financial Officer of Canadian Solar commented: "Our fourth quarter 2012 financial results do not fully reflect our progress given the non-cash charges that negatively impacted our results. From an ongoing operations standpoint, we are encouraged with our results. Sequentially, our solar module shipments were up, our gross margin more than doubled despite underutilization charges, our inventories were reduced by $43.3 million and our short-term borrowings were reduced by $31.6 million. We are focusing on profitability over growth and on markets where we can generate the best returns. In addition, we are starting to see signs of price stabilization across the value chain, which is reflected in our better than expected gross margin in the fourth quarter. We are encouraged by the rapid expansion of our total solutions business. Finally, we are pleased that the groundwork that we have laid over the past several years has paid off with our proven ability to finance the purchase of projects and their construction before sale."
Utility Scale Project Pipeline Update
As previously announced, the Company acquired 16 utility-scale solar projects from SkyPower Limited in June of 2012. During the fourth quarter of 2012, the Company entered into an agreement with SunEdison Power Canada Inc. ("SunEdison"), a subsidiary of MEMC Electronic Materials, Inc., to acquire four solar power projects for an aggregate transaction price of approximately C$37.0 million (US$38.0 million). These acquisitions augment the 9 green-field projects which the Company had previously been awarded, and expand Canadian Solar's utility-scale pipeline in Ontario, Canada to 29 projects, totaling approximately 400MW DC. Of these projects, 2 have been completed and are now in the testing phase before completing the sale to an investor, 7 are expected to be completed in 2013, 18 in 2014 and 2 in 2015. The Company expects to recognize revenue using the percent of completion method for all projects, except the 9 sold to TransCanada. As a result, of the 18 projects expected to be completed in 2014, 15 will start construction and contribute to revenue in 2013. The Company estimates that the resale value of its Ontario project pipeline, once built into grid-connected solar power plants and sold to investors, will exceed C$1.50 billion (US$1.47 billion).
In addition to its own projects, the Company is currently in the process of building three solar power plants totaling 29MWdc as Engineering, Procurement and Construction (EPC) contractor on behalf of Penn Energy Renewables Ltd. The Company expects to complete these projects in the second half of 2013.
In the U.S. market, Canadian Solar has expanded its utility-scale project pipeline to approximately 255MW DC. In fiscal year 2013, the Company expects to complete construction of solar power plants totaling 100MW DC in the U.S.
Business Outlook
The Company's business outlook is based on management's current views with respect to operating and market conditions, its current order book, and the challenging industry environment, which continues to result in customer demand uncertainty. Management's views and estimates are subject to change without notice.
For the first quarter of 2013, the Company expects photovoltaic module shipments to be in the range of approximately 290MW to 310MW, with gross margin expected to be between 8.0% and 10.0%.
For the full year 2013, the Company expects photovoltaic module shipments to be in the range of approximately 1.6GW to 1.8GW, including modules used in our total solutions business.
Dr. Shawn Qu, Chairman and Chief Executive Officer of Canadian Solar, remarked: "Clearly, our strategic decision to focus on the downstream total solution business several years ago has proven to be the right one. This is highlighted by our success at building scale in this business in low risk countries such as Canada, Japan and the U.S. Our total solutions business capability and project pipeline, supported by our low cost manufacturing capability, position us well for the next phase of growth in the solar power industry. Our focus for 2013 is on returning to profitability on a full year basis."